MENA: Still low oil prices force countries to tap into international financial markets

June 7, 2016

The overall situation in the Middle East and North Africa (MENA) seems to have taken a turn for the worse at the start of 2016 despite the rally in oil prices that began in mid-January and more stable global financial conditions. Oil prices are still low and this is hurting oil-producing countries’ coffers, while geopolitical risks, subdued global demand and challenging domestic conditions are putting a dent in MENA’s growth. Only a handful of countries have released GDP data for Q1 GDP. The available data show that a severe drought hit growth in Morocco in Q1, while security threats continued to hamper economic activity in Tunisia. In Israel, weak global demand took its toll on GDP growth.

The average price of the Organization of the Petroleum Exporting Countries’ (OPEC) oil basket has recovered around 80% of its value since it hit an over-ten-year low in January. Despite the steady increase observed in recent months, oil prices are still well below the break-even cost for many oil-producing countries. Although most of these countries built up massive fiscal buffers (in the form of strong currency reserves and low public debt) during the commodities boom, the current situation of protracted low oil prices is eroding their once-unbeatable financial position. In an attempt to plug their large fiscal deficits, some countries have started or are planning to tap into international financial markets. On 25 May, Qatar sold USD 9.0 billion in bonds, which represented the first issuance in over four years, while Abu Dhabi raised USD 5.0 billion in sovereign bonds in April. Moreover, Saudi Arabia is planning its first ever international bond issue, which is expected to amount to USD 15 billion, while both Dubai and Oman will likely offer USD 1.0 billion in bonds to international investors. As a result, MENA is set to post its largest foreign debt issuance on record in 2016.

Although low oil prices are one of the main reasons behind MENA’s poor economic performance, regional political leaders missed another opportunity to launch a coordinated move to prop up oil prices. OPEC members gathered on 2 June at their 169th ordinary meeting and decided to stick to the laissez-faire policy of allowing countries to freely pump crude. While tensions between the two regional powers, Iran and Saudi Arabia, were less acute than at April’s Doha meeting, the two countries are proponents of different strategies. While Saudi Arabia, along with its Gulf allies, proposed a new collective ceiling for all OPEC members, Iran was in favor of reintroducing individual-country production quotas. According to Iran’s Minister of Petroleum Bijan Zanganeh, Iran should recover its pre-sanction share of 14.5% in the next five years, which would imply an oil output of around 4.8 million barrels per day.

While oil prices are not anywhere near the break-even cost for the majority of countries in the region—which implies large fiscal deficits and less supportive policy backing— improving prospects for prices provide some relief to crude-producing countries. Nonetheless, downside risks persist in the region in the form of geopolitical risks and an uncertain global outlook. FocusEconomics Consensus Forecast panelists left their 2016 growth forecasts for the region stable for the first time in seven months. They expect growth to tally 2.4% in 2016. If confirmed, this will represent the weakest growth since the height of the financial crisis in 2009. For 2017, growth in the region is expected to accelerate to 3.1%.

Qatar is expected to be the best performer in 2016, followed by Iran, which is benefiting from its reintegration into the global economy. At the other end of the spectrum, Saudi Arabia and Lebanon are expected to perform poorly. Nevertheless, Yemen, which is entangled in a bloody civil war, will be the worst performer by far. Among the rest of the major economies in the region, Egypt and Israel will likely grow the fastest, with projected expansions of 3.3% and 2.8%, respectively.

SAUDI ARABIA | The Kingdom is ready to tap into international bond markets for first time ever

On 6 June, Saudi Arabia’s cabinet approved the National Transformation Plan, a key element of the Vision 2030. Specific details of the plan, including the pivotal sale of less than 5% of state oil firm Saudi Aramco on the stock market, will be revealed in the coming days. Despite the steady increase in oil prices observed since January, prices are still low, which is depleting the country’s wealthy coffers. Saudi Arabia’s currency reserves are at an over-four-year low, while the fiscal gap is expected to be in the double digits for the second consecutive year in 2016. Against this backdrop, the country is preparing for a USD 15 billion bond sale—the first time ever that the Kingdom will tap into international financial markets.

The reform momentum has picked up in recent months with the approval of the Vision 2030. Although there is a lot of uncertainty regarding the implementation of the plan, the country is expected to benefit from Deputy Crown Prince Mohamed bin Salman’s plan to transition the Kingdom’s economy toward a more sustainable non-oil model in the long run. That said, still-low oil prices, geopolitical tensions and less lavish government spending will threaten short-term growth. The analysts we polled expect that GDP will grow 1.1% this year, which is down 0.1 percentage points from last month's forecast. Next year, the panel expects GDP growth to accelerate to 1.7%.

UAE | Falling oil revenues continue to threaten budget sustainability

Oil prices have advanced steadily since hitting historical lows at the beginning of the year. This is a welcome development for UAE’s government, which derives 65% of its revenues from oil sales. Due to the collapse in oil prices, the UAE posted a fiscal deficit in 2015 and has had to reevaluate its fiscal consolidation practices—a rare move on the part of the oil-rich country. Although the government is hoping that oil prices will reach more accommodative levels, a great deal of uncertainty still clouds the trajectory for oil prices, which have substantial downside risks to the outlook. While the UAE is backed by sizable fiscal buffers, which are able to absorb a prolonged period of low oil prices, the government has yet to deliver policy aimed at repairing government finances and bringing them back to sustainable levels.

Weak external demand and still-low oil prices present challenges to both the oil and non-oil sectors in the UAE. FocusEconomics panelists expect that the economy will grow 2.5% this year, which is unchanged from last month's forecast. Next year, the panel expects GDP to expand 2.8%.

EGYPT | Terrorist attacks add to hard currency scarcity

Egypt’s economy is standing on shaky ground. A drop in tourism has been dragging on economic activity since late-2015. Fewer tourists and lower revenues from the Suez Canal have caused the country’s international reserves to plunge. The crash of an EgyptAir flight in the Mediterranean in May will be another setback for tourism. Acute dollar shortages are restraining business activity and have negative repercussions on the wider economy. Moreover, Egypt’s fiscal position worsened as financial support from its oil-rich regional peers weakened amid the oil price slump. S&P Global Ratings’ move to downgrade Egypt’s credit outlook from stable to negative in May reflects these increasing imbalances. That said, the government’s fiscal consolidation targets recently laid out in the 2017 draft budget come as positive news. Measures to curb the deficit include a reduction in the state subsidy bill by 14% and implementation of the belated Value-added Tax.

GDP will likely expand at a moderate pace this year. Economic growth is being restrained by dollar shortages, macroeconomic imbalances, political uncertainties and slow reform implementation. While the government’s fiscal reform plans are a step into the right direction, it remains to be seen if it will be able to meet its targets. Our panelists expect GDP to expand 3.3% in FY 2016 and 4.0% in FY 2017.

ISRAEL | Weak global demand weighs on growth in Q1

Following a significant acceleration in the final quarter of last year, Israel’s economy lost ground in the first quarter of 2016 and GDP grew a meager 0.8% over the previous quarter in seasonally adjusted annualized terms (SAAR). Economic growth in Q1 was dragged down by a disappointing government consumption, which contracted for the first time in a year. Private consumption also decelerated from Q4’s figure even though growth remains robust as household spending was supported by the loose monetary policy the Central Bank has adopted. On the external side of the economy, demand was subdued in Q1 and exports contracted over the previous quarter. Despite Q1’s deceleration, the economy is expected to perform better in Q2. In May, business confidence remained high and the recent depreciation of the shekel in May will likely give a much-needed boost to the country’s exports.

The economy is expected to accelerate this year. However, external risks from geopolitical factors and a slow recovery in global demand are weighing on the country’s economic outlook. Our panelists expect the economy to grow 2.8% in 2016, which is down 0.1 percentage points from last month’s estimate. For 2017, our panel forecasts GDP to expand 3.2%.

INFLATION | Inflation inches up in April from March’s record-low

Inflation in the Middle East and North Africa region rose from March’s 3.5% to 3.6% in April. March’s print was the lowest on record. Divergent forces are driving MENA’s inflation outlook. While weak global demand, subdued regional growth and less volatile global financial markets are containing inflationary pressures, subsidy reforms have to potential to spur inflation in the coming months.

Despite April’s slight increase, risks to the inflation outlook appear to be on the downside. As a result, FocusEconomics panelists cut their 2016 estimates for the MENA region by 0.1 percentage points to 4.7%. In 2017, inflation is expected to increase to 5.1%.

Jobless claims fell by 7,200 in January according to the Office for National Statistics (ONS) compared to a revised 6,200 uptick in December (previously reported: +8,600) and defying analysts’ expectations of a rise in the claimant count.